Staff research

Existing literature documents that house prices respond to monetary policy surprises with a significant delay, taking years to reach their peak response. We present new evidence of a much faster response.

This note examines the merits of monetary policy adjustments in response to financial stability concerns, taking into account changes in the state of knowledge since the renewal of the inflation-targeting agreement in 2011. A key financial system vulnerability in Canada is elevated household indebtedness: as more and more households are nearing their debt-capacity limits, the likelihood and severity of a large negative correction in housing markets are also increasing.